Thursday, July 2, 2015

South Korea unveils US$14.3b stimulus package to support economy

JUL 3, 20158:09 AM

[SEJONG] South Korea proposed on Friday a stimulus package worth 16.1 trillion won (S$19.40 billion) to jump-start Asia's fourth-largest economy as it fights to overcome the twin challenges of weak domestic and global demand.

The government set an 11.8 trillion won supplementary budget, which included new spending plans of 6.2 trillion won, and 5.6 trillion won to cover a tax shortfall, the finance ministry said in a statement.

It also confirmed a separate financial package totaling 9.9 trillion won.

Even though the additional spending will put a strain on the government's fiscal position, the ministry said Seoul's immediate priority is to revive an economy reeling from a collapse in exports and the spread of the deadly Middle East Respiratory Syndrome (MERS) virus. "Our fiscal soundness will worsen temporarily, but we have decided it is more important to make the economy recover early on and create a sturdy fiscal foundation," said Vice Finance Minister Bang Moon-kyu told an embargoed briefing.

The government is targeting gross domestic product growth of 3.1 per cent this year, though analysts doubt it could be achieved even with the additional spending - the finance ministry expects the total stimulus to boost economic growth by 0.3 percentage points.

The ministry said it plans to sell 9.6 trillion won in new treasury bonds to fund the bulk of the supplementary budget, with the remainder funded by other means such as existing public funds.

The financial support package include plans to increase the amount of credit guarantees and trade financing, and has no direct bearing on the budget.

The outbreak of MERS in late May - the largest outside of Saudi Arabia with 33 deaths and 184 cases reported so far - has scared off tourists and kept South Koreans off cinemas, restaurants and shopping areas.

Confidence among consumers and manufacturing companies slumped to multi-year lows, recent surveys showed, highlighting why policymakers had to move quickly to prop up the ailing economy.

The government's fiscal deficit would now reach 3.0 per cent of the annual gross domestic product this year, higher than a 2.1 per cent deficit projected earlier.

The debt-to-GDP ratio will also rise to 37.5 per cent this year from the previous target of 35.7 per cent projected, the ministry said. This is still far lower than the world average of 57.7 per cent in 2014, according to the CIA's World Factbook.

The central bank cut the policy interest rate by 25 basis points to a record low of 1.50 per cent last month, citing the impact of MERS on domestic demand. Some analysts say the Bank of Korea will have to cut the rate again in coming months.

The government will move the supplementary budget to parliament on July 6 for approval.

REUTERS

Greece needs US$40b in fresh euro-area money, IMF says

JUL 3, 20157:12 AM

[WASHINGTON] Greece needs at least another 36 billion euros (S$53.8 billion) over the next three years from euro-area states and easier terms on existing debt to keep the nation's finances sustainable, according to an International Monetary Fund analysis.

Even if Greece delivers on reforms proposed by its international creditors, euro countries will have to come up with new financing and ease the nation's debt load through steps such as doubling maturities on existing loans, according to a June 26 "preliminary draft" debt-sustainability analysis released Thursday.

The Washington-based lender puts Greece's total financing needs at 50 billion euros from October 2015 through the end of 2018. It also says state deposits in the Greek banking system had declined to less than 1 billion euros at the end of May, before the nation closed its banks and imposed capital controls.

Any weakening of the package proposed by the IMF and its creditor partners, the European Commission and European Central Bank, means Europeans must accept a "haircut," or writedown on the principal of the loans, according to the analysis. The document's date is the day before Greek Prime Minister Alexis Tsipras called a surprise July 5 referendum on the creditors' proposal.

The analysis suggests any new deal is doomed to keep Greece wallowing in debt unless the Greek government and its European creditors can make further concessions. It also indicates the IMF, smarting from a US$1.7 billion missed payment by Greece this week, may be reluctant to dispense new money without better prospects that the nation's debt will be brought under control.

The timing of the analysis will prove controversial, since Mr Tsipras is sure to use it to bolster his argument that Greeks should reject the creditors' proposal in Sunday's vote, said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington.

The IMF is suggesting that "Greece was essentially on track last November until Syriza blew up the political system and now the economy," while hinting that it wouldn't welcome working with the anti-austerity party in the future, he said.

The IMF report justifies the Greek government's position and its persistence in including debt restructuring in any deal with creditors, said Gabriel Sakellaridis, a government spokesman. The report is a "confession" of the bailout's failure, he said in an e-mail.

In a preface to the report, the IMF cautioned that the document didn't reflect developments - including bank closures, capital controls and IMF arrears - that happened since it was prepared.

'Significant' Impact "These developments are likely to have a significant adverse economic and financial impact that has not yet been reflected in this draft," the IMF said. The report hadn't been agreed to by other parties in the Greek talks, and it was circulated to, but not approved or discussed by, the IMF's executive board, the fund said.

Under IMF practice, loan programs need to be fully financed for 12 months and a country's debt must be sustainable. Greece must first pay back its arrears to the IMF before it can access any of the nearly US$19 billion remaining on the fund's 2012 bailout, which expires in March.

The IMF analysis shows how badly Greece's finances have deteriorated from May 2014, when the fund last assessed the country's debt. At the time, the lender expected the country's debt-to-GDP ratio to drop to 128 per cent by 2020; the latest report saw a ratio of about 150 per cent in 2020.

BLOOMBERG

Thursday, July 2, 2015